Inactivity Of Company For Two Years No Bar To Insolvency Proceedings: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has recently ruled that a company cannot avoid insolvency proceedings simply because it has not been operating for two years.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra while upholding insolvency proceedings against Sant Kripa Appliances said, “the mere fact that CD was not functioning for last two years cannot be a ground to not take a proceeding for resolution of the CD which has defaulted from its financial obligations. The said ground also cannot be a reason for interjecting the order. ”

The case reached the tribunal after the former director of Shree Sant Kripa challenged an order allowing HDFC Bank Ltd to initiate insolvency proceedings against the company. HDFC Bank has claimed unpaid dues of Rs 69.49 crore.

The appeal had at first been filed in the company's name but was later refiled by its ex-director after the bank objected.

The appellant told the tribunal that the company was in talks with banks to settle its debts and had offered to repay 70 percent of the outstanding amounts. It also argued that insolvency proceedings should not be used as a recovery tool and pointed to a recent Supreme Court judgment to support its stand.

Another argument was that the company had not been functioning for two years, had no employees, and that the insolvency petition was being used only to recover money.

HDFC Bank responded that the settlement proposal came only after the insolvency application had already been admitted. The bank's lawyer also said there were no instructions from the bank regarding the appellant's claims about settlement discussions.

The tribunal noted that a Committee of Creditors has already been formed to decide on the company's future, and that any settlement at this stage can only be considered under the mechanism provided in Section 12A of the Insolvency and Bankruptcy Code.

It allowed the appellant to approach HDFC Bank with any settlement offer, which can then be placed before the creditors for approval.

Rejecting the argument that the company's non-functioning status could shield it from insolvency, the tribunal dismissed the appeal.